Employees of small businesses pay more on 401(k) plans

A worker at a small company will pay three times more in fees on their retirement account than a worker at a larger company.

That’s the conclusion of a Bankrate.com analysis that found that, over a period of 35 years, even a small difference in fees can drastically reduce an employee’s retirement savings.

A worker at a small company paying 1.41 percent in fees would cough up $113,206 more in fees over that timeframe than someone who participated in a larger plan and paid, say, only 49 basis points, a lower rate that only larger employers typically enjoy.

Why the huge discrepancy? Fees that are charged to a 401(k) plan are amortized over the number of participants in the plan. So if a big plan has 10,000 participants, fees will be divided between those employees, and if a plan has 25 employees, the same applies. In other words, big plans have the luxury of economies of scale.

Larger companies, Bankrate said, also have more pull than small companies when it comes to negotiating lower fees on their retirement plans.

They also can dedicate more resources and personnel to managing their retirement plans than mom-and-pop shops, where the person in charge of the plan isn’t very knowledgeable about how plans work, according to Sheyna Steiner, senior investing analyst and author of the Bankrate.com analysis.

Larger plans may know more about the impact of fees on retirement outcomes so they use their size and leverage to negotiate fees down. That can translate into participants in larger companies being able to amass more than $100,000 over their small-firm counterparts over 35 years, according to Bankrate.com.

Bankrate.com based its analysis on three hypothetical participants who all began their careers at age 25 earning $30,000 and deferring 7 percent of their salary into their 401(k) plan over 35 years. Each received a 3 percent match from their employers, and each earned 3 percent raises each year throughout their careers. Their investments generated returns of 8 percent, minus their plan’s costs.

Compounding grows any savings over time, but fees erode that growth. Inflation also can eat away at retirement savings.

On an account valued at $675,698 after 35 years, the value of that account would be $240,132 after it is adjusted for inflation. So those paying 1.41 percent in fees would see their $562,492 nest egg reduced to less than $200,000 in inflation-adjusted funds, according to Bankrate.com.

The nation's 401(k) plans held an estimated $3.5 trillion in assets, or about 18 percent of the $19.4 trillion U.S. retirement market, according to the latest figures. The Department of Labor last year put into effect new fee disclosure rules to help employers and participants better identify costs associated with their investment accounts.